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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___________ to ___________
Commission File No. 1-11778 I.R.S. Employer Identification No. 98-0091805
ACE LIMITED
(Incorporated in the Cayman Islands)
ACE Global Headquarters
17 Woodbourne Avenue
Hamilton HM 08
Bermuda
Telephone 441-295-5200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -------
The number of registrant's Ordinary Shares ($0.041666667 par value)
outstanding as of November 8, 2002 was 262,650,978.
ACE LIMITED
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION Page No.
- ------------------------------ --------
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 2002 (Unaudited) and December 31, 2001 3
Consolidated Statements of Operations (Unaudited)
Three and Nine Months Ended September 30, 2002 and 2001 4
Consolidated Statements of Shareholders' Equity (Unaudited)
Nine Months Ended September 30, 2002 and 2001 5
Consolidated Statements of Comprehensive Income (Unaudited)
Nine Months Ended September 30, 2002 and 2001 7
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2002 and 2001 8
Notes to Interim Consolidated Financial Statements (Unaudited) 9
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 31
Item 3. Quantitative and Qualitative Disclosures about Market Risk 67
Item 4. Controls and Procedures 68
Part II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 69
Item 6. Exhibits and Reports on Form 8-K 69
2
ITEM 1. Financial Statements
- ----------------------------
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30 December 31
2002 2001
-------------- -------------
(Unaudited)
(in thousands of U.S. dollars,
except share and per share data)
Assets
Investments and cash
Fixed maturities available for sale, at fair value (amortized cost -
$12,991,777 and $12,794,444) $ 13,504,458 $ 13,000,165
Equity securities, at fair value (cost - $560,583 and $516,028) 401,142 467,566
Securities on loan, at fair value (amortized cost - $518,177 and $0) 532,876 -
Short-term investments, at fair value 2,004,144 1,205,795
Other investments (cost - $619,077 and $569,045) 645,164 591,006
Cash 649,774 671,381
------------- --------------
Total investments and cash 17,737,558 15,935,913
Accrued investment income 212,342 213,821
Insurance and reinsurance balances receivable 3,208,065 2,521,562
Accounts and notes receivable 240,088 242,724
Reinsurance recoverable 11,889,368 11,398,446
Deferred policy acquisition costs 823,374 679,281
Prepaid reinsurance premiums 1,646,301 1,222,795
Goodwill 2,716,860 2,772,094
Deferred tax assets 1,151,937 1,250,835
Other assets 1,203,892 949,293
------------- --------------
Total assets $ 40,829,785 $ 37,186,764
============= ==============
Liabilities
Unpaid losses and loss expenses $ 21,641,231 $ 20,728,122
Future policy benefits for life and annuity contracts 419,041 382,730
Unearned premiums 5,525,634 3,853,429
Premiums received in advance 44,585 57,486
Insurance and reinsurance balances payable 1,826,319 1,418,001
Contract holder deposit funds 93,136 101,187
Securities lending collateral 546,385 -
Accounts payable, accrued expenses and other liabilities 1,483,048 1,466,127
Dividends payable 47,689 42,044
Short-term debt 220,280 495,408
Long-term debt 1,748,869 1,349,473
Trust preferred securities 475,000 875,000
------------- --------------
Total liabilities 34,071,217 30,769,007
------------- --------------
Commitments and contingencies
Mezzanine equity 311,050 311,050
------------- --------------
Shareholders' equity
Ordinary Shares ($0.041666667 par value, 500,000,000 shares authorized;
262,495,210 and 259,861,205 shares issued and outstanding) 10,937 10,828
Additional paid-in capital 3,780,132 3,710,698
Unearned stock grant compensation (47,390) (37,994)
Retained earnings 2,419,034 2,321,576
Deferred compensation obligation 18,630 16,497
Accumulated other comprehensive income 284,805 101,599
Ordinary Shares issued to employee trust (18,630) (16,497)
------------- --------------
Total shareholders' equity 6,447,518 6,106,707
------------- --------------
Total liabilities, mezzanine equity and shareholders' equity $ 40,829,785 $ 37,186,764
============= ==============
See accompanying notes to the interim consolidated financial statements
3
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2002 and 2001
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
------------- ------------- -------------- -------------
(in thousands of U.S. dollars, except per share data)
Revenues
Gross premiums written
Property and casualty premiums $ 3,470,196 $ 2,470,195 $ 9,460,386 $ 7,403,515
Life and annuity premiums 58,529 32,176 115,440 63,155
------------- ------------- -------------- -------------
3,528,725 2,502,371 9,575,826 7,466,670
Reinsurance premiums ceded (1,305,938) (1,197,304) (3,491,633) (2,955,840)
Net premiums written ------------- ------------- -------------- -------------
Property and casualty premiums 2,165,939 1,272,891 5,972,395 4,447,675
Life and annuity premiums 56,848 32,176 111,798 63,155
------------- ------------- -------------- -------------
2,222,787 1,305,067 6,084,193 4,510,830
Change in unearned premiums (297,208) 94,362 (1,223,098) (357,098)
Net premiums earned ------------- ------------- -------------- -------------
Property and casualty premiums 1,868,731 1,367,253 4,749,526 4,090,577
Life and annuity premiums 56,848 32,176 111,569 63,155
------------- ------------- -------------- -------------
1,925,579 1,399,429 4,861,095 4,153,732
Net investment income 199,740 192,909 600,679 593,606
Other income (expense) ` (14,032) (1,858) (21,301) 827
Net realized losses on investments (235,282) (58,843) (400,884) (62,654)
------------- ------------- -------------- -------------
Total revenues 1,876,005 1,531,637 5,039,589 4,685,511
------------- ------------- -------------- -------------
Expenses
Losses and loss expenses 1,327,792 1,541,627 3,141,886 3,447,761
Life and annuity benefits 59,697 29,706 106,004 58,511
Policy acquisition costs 253,013 204,666 685,016 558,996
Administrative expenses 250,668 205,531 677,597 608,615
Interest expense 48,679 49,130 146,633 153,094
Amortization of goodwill - 19,912 - 59,664
------------- ------------- -------------- -------------
Total expenses 1,939,849 2,050,572 4,757,136 4,886,641
------------- ------------- -------------- -------------
Income (loss) before income tax and cumulative
effect of adopting a new accounting standard (63,844) (518,935) 282,453 (201,130)
Income tax expense (benefit) (7,334) (76,345) 37,258 (31,121)
Income (loss) before cumulative effect of adopting ------------- ------------- -------------- -------------
a new accounting standard (56,510) (442,590) 245,195 (170,009)
Cumulative effect of adopting a new accounting
standard (net of income tax) - - - (22,670)
------------- ------------- -------------- -------------
Net income (loss) $ (56,510) $ (442,590) $ 245,195 $ (192,679)
============= ============= ============== =============
Basic earnings (loss) per share before cumulative
effect of adopting a new accounting standard $ (0.24) $ (1.95) $ 0.87 $ (0.82)
============= ============= ============== =============
Basic earnings (loss) per share $ (0.24) $ (1.95) $ 0.87 $ (0.92)
============= ============= ============== =============
Diluted earnings (loss) per share before cumulative
effect of adopting a new accounting standard $ (0.24) $ (1.95) $ 0.84 $ (0.82)
============= ============= ============== =============
Diluted earnings (loss) per share $ (0.24) $ (1.95) $ 0.84 $ (0.92)
============= ============= ============== =============
See accompanying notes to the interim consolidated financial statements
4
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the nine months ended September 30, 2002 and 2001
(Unaudited)
2002 2001
------------ ------------
(in thousands of U.S. dollars)
Ordinary Shares
Balance - beginning of period $ 10,828 $ 9,681
Shares issued 36 8
Exercise of stock options 81 41
Issued under Employee Stock Purchase
Plan (ESPP) 10 9
Cancellation of Shares (18) (24)
Repurchase of Shares - (282)
------------- -------------
Balance - end of period 10,937 9,433
------------- -------------
Additional paid-in capital
Balance - beginning of period 3,710,698 2,637,085
Ordinary Shares issued 36,509 3,206
Exercise of stock options 40,642 19,729
Ordinary Shares issued under ESPP 7,462 7,054
Cancellation of Ordinary Shares (15,179) (15,145)
Repurchase of Ordinary Shares - (76,849)
------------- -------------
Balance - end of period 3,780,132 2,575,080
------------- -------------
Unearned stock grant compensation
Balance - beginning of period (37,994) (29,642)
Stock grants awarded (39,106) (18,503)
Stock grants forfeited 7,830 813
Amortization 21,880 7,203
------------- -------------
Balance - end of period (47,390) (40,129)
------------- -------------
Retained earnings
Balance - beginning of period 2,321,576 2,733,633
Net income (loss) 245,195 (192,679)
Dividends declared on Ordinary Shares (128,491) (98,756)
Dividends declared on FELINE PRIDES (19,246) (19,179)
Repurchase of Ordinary Shares - (102,315)
------------- -------------
Balance - end of period 2,419,034 2,320,704
------------- -------------
Deferred compensation obligation
Balance - beginning of period 16,497 14,597
Net increase to obligation 2,133 1,900
------------- -------------
Balance - end of period $ 18,630 $ 16,497
------------- -------------
See accompanying notes to the interim consolidated financial statements
5
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (cont'd.)
For the nine months ended September 30, 2002 and 2001
(Unaudited)
2002 2001
------------ ------------
(in thousands of U.S. dollars)
Accumulated other comprehensive income
Net unrealized appreciation
(depreciation) on investments
Balance - beginning of period $ 136,916 $ 102,335
Change in period, net of income tax 182,553 84,629
------------ -----------
Balance - end of period 319,469 186,964
------------ -----------
Cumulative translation adjustments
Balance - beginning of period (35,317) (32,881)
Change in period, net of income tax 653 (1,391)
------------ -----------
Balance - end of period (34,664) (34,272)
------------ -----------
Accumulated other comprehensive income 284,805 152,692
------------ -----------
Ordinary Shares issued to employee trust
Balance - beginning of period (16,497) (14,597)
Net increases in Ordinary Shares (2,133) (1,900)
------------ -----------
Balance - end of period (18,630) (16,497)
------------ -----------
Total shareholders' equity $ 6,447,518 $5,017,780
============ ===========
See accompanying notes to the interim consolidated financial statements
6
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the nine months ended September 30, 2002 and 2001
(Unaudited)
2002 2001
------------ ------------
(in thousands of U.S. dollars)
Net income (loss) $ 245,195 $ (192,679)
Other comprehensive income (loss)
Net unrealized appreciation (depreciation)
on investments
Unrealized appreciation (depreciation)
on investments 227,651 137,718
Less: reclassification adjustment for
net realized (gains) losses
included in net income 42,654 (15,334)
----------- ------------
270,305 122,384
Cumulative translation adjustments 4,150 (6,297)
----------- ------------
Other comprehensive income, before
income tax 274,455 116,087
Income tax expense related to other
comprehensive income items (91,248) (32,849)
----------- ------------
Other comprehensive income 183,207 83,238
----------- ------------
Comprehensive income (loss) $ 428,402 $ (109,441)
=========== ============
See accompanying notes to the interim consolidated financial statements
7
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2002 and 2001
(Unaudited)
2002 2001
------------- -------------
(in thousands of U.S. dollars)
Cash flows from operating activities
Net income (loss) $ 245,195 $ (192,679)
Adjustments to reconcile net income to net cash provided by
operating activities:
Unpaid losses and loss expenses, net of reinsurance
recoverable 377,390 750,610
Future policy benefits for life and annuity contracts 34,238 56,732
Unearned premiums 1,639,827 753,329
Prepaid reinsurance premiums (423,506) (376,271)
Deferred income taxes 9,089 (69,604)
Net realized losses on investments 400,884 62,654
Amortization of premium/discounts on fixed maturities 28,364 (5,166)
Deferred policy acquisition costs (135,932) (115,426)
Insurance and reinsurance balances receivable (670,472) (375,967)
Premiums received in advance (12,901) (5,143)
Insurance and reinsurance balances payable 411,633 244,558
Accounts payable, accrued expenses and other liabilities (88,061) 92,028
Other (223,841) 59,333
Cumulative effect of adopting a new accounting standard - 22,670
Amortization of goodwill - 59,664
------------- --------------
Net cash flows from operating activities $ 1,591,907 $ 961,322
------------- --------------
Cash flows from investing activities
Purchases of fixed maturities (12,751,573) (10,914,332)
Purchases of equity securities (154,835) (158,103)
Sales of fixed maturities 11,468,572 10,371,634
Sales of equity securities 110,377 153,871
Maturities of fixed maturities 249,426 39,190
Net realized losses on financial futures contracts (117,580) (44,060)
Acquisition of subsidiary, net of cash acquired 54,380 -
Other (102,411) (83,821)
------------- --------------
Net cash used for investing activities $ (1,243,644) $ (635,621)
------------- --------------
Cash flows from financing activities
Dividends paid on Ordinary Shares (122,846) (94,279)
Dividends paid on FELINE PRIDES (19,246) (19,251)
Net proceeds from (repayment of) short-term debt (275,128) 86,961
Repayment of trust preferred securities (400,000) -
Proceeds from exercise of options for Ordinary Shares 40,723 19,770
Proceeds from shares issued under ESPP 7,472 7,063
Proceeds from long-term debt 399,155 -
Repurchase of Ordinary Shares - (179,446)
------------- --------------
Net cash used for financing activities $ (369,870) $ (179,182)
------------- --------------
Net increase (decrease) in cash (21,607) 146,519
Cash - beginning of period 671,381 608,069
------------- --------------
Cash - end of period $ 649,774 $ 754,588
============= ==============
See accompanying notes to the interim consolidated financial statments
8
ACE LIMITED AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(Unaudited)
1. General
The interim unaudited consolidated financial statements, which include the
accounts of the Company and its subsidiaries, have been prepared in accordance
with accounting principles generally accepted in the United States of America
and, in the opinion of management, reflect all adjustments (consisting of
normally recurring accruals) necessary for a fair presentation of results for
such periods. The results of operations and cash flows for any interim period
are not necessarily indicative of results for the full year. These financial
statements should be read in conjunction with the consolidated financial
statements, and related notes thereto, included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2001.
ACE Limited ("ACE" or "the Company") is a holding company incorporated with
limited liability under the Cayman Islands Companies Law and maintains its
principal business office in Bermuda. The Company, through its various
subsidiaries, provides a broad range of insurance and reinsurance products to
insureds worldwide. During the first quarter of 2002, following changes in
executive management responsibilities, the Company reassessed and changed its
reporting segments from the individual operating units to lines of business. The
four reporting segments are: Insurance - North American, Insurance - Overseas
General, Global Reinsurance and Financial Services. These segments are described
in Note 14.
The following table summarizes the Company's gross premiums written by
geographic region for the nine months ended September 30, 2002 and 2001.
Allocations have been made on the basis of location of risk:
Nine Months North Australia & Asia
Ended America Europe New Zealand Pacific Latin America
September 30, 2002 64% 22% 2% 8% 4%
September 30, 2001 62% 22% 2% 9% 5%
2. New accounting pronouncements
In June 2001, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). FAS 142 primarily addresses the accounting
for goodwill and intangible assets subsequent to their acquisition. As
required, the Company adopted FAS 142 on January 1, 2002 and ceased
amortizing goodwill at that time. All goodwill recognized in the Company's
consolidated balance sheet at January 1, 2002 was assigned to one or more
reporting units. FAS 142 requires that goodwill in each reporting unit be
tested for impairment by June 30, 2002. Any impairment loss recognized as a
result of a transitional impairment test of goodwill should be reported as
the cumulative effect of a change in accounting principle. Management has
determined that there was no impairment in goodwill as a result of the
test. As discussed in Note 14 "Segment information", we do not allocate
assets to our new segments, therefore, changes in goodwill are not
disclosed by segment. The following table details the movement in goodwill
during the nine months ended September 30, 2002. The reduction in goodwill
is a result of the settlement of a lawsuit involving a prior acquisition.
ACE
Consolidated
--------------
Goodwill at beginning of period $ 2,772,094
Adjustment to purchased goodwill (55,234)
--------------
Goodwill at end of period $ 2,716,860
==============
9
ACE LIMITED AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements (cont'd)
(Unaudited)
The following table provides a reconciliation of prior year reported net income
to adjusted net income had FAS 142 been applied at the beginning of fiscal 2001:
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
----------- ----------- ----------- -----------
(in thousands of U.S. dollars, except per share data)
Reported net income (loss) $ (56,510) $ (442,590) $ 245,195 $ (196,679)
Add back: Goodwill amortization - 19,912 - 59,664
----------- ----------- ----------- -----------
Adjusted net income (loss) $ (56,510) $ (422,678) $ 245,195 $ (137,015)
=========== =========== =========== ===========
Basic earnings (loss) per share:
Reported earnings (loss) per share $ (0.24) $ (1.95) $ 0.87 $ (0.92)
Add back: Goodwill amortization - 0.09 - 0.26
----------- ----------- ----------- -----------
Adjusted earnings (loss) per share $ (0.24) $ (1.86) $ 0.87 $ (0.66)
=========== =========== =========== ===========
Diluted earnings (loss) per share:
Reported earnings (loss) per share $ (0.24) $ (1.95) $ 0.84 $ (0.92)
Add back: Goodwill amortization - 0.09 - 0.26
----------- ----------- ----------- -----------
Adjusted earnings (loss) per share $ (0.24) $ (1.86) $ 0.84 $ (0.66)
=========== =========== =========== ===========
3. Securities on loan
We participate in a securities lending program whereby certain securities from
our portfolio are loaned to other institutions for short periods of time. The
market value of the loaned securities is monitored on a daily basis with
additional collateral obtained or refunded as the market value of the loaned
securities changes. Our policy is to require initial cash collateral equal to
102 percent of the fair value of the loaned securities. The proceeds from the
collateral are invested in short-term investments and are reported on the
balance sheet. We maintain full ownership rights to the securities loaned, and
continue to earn interest on them. We share a portion of the interest earned on
these short-term investments with the lending agent. In addition, we have the
ability to sell the securities while they are on loan. We have an
indemnification agreement with the lending agents in the event a borrower
becomes insolvent or fails to return securities. Securities lending collateral
of $546 million is recorded in short-term investments and fixed maturities and
in liabilities. The fair value of the securities on loan of $533 million at
September 30, 2002 is reported on a separate line in total investments and cash.
There were no securities loaned in 2001.
4. Commitments and contingencies
The Company has considered asbestos and environmental claims and claims
expenses in establishing the liability for unpaid losses and loss expenses.
The Company has developed reserving methods, which incorporate new sources of
data with historical experience to estimate the ultimate losses arising from
asbestos and environmental exposures. The reserves for asbestos and
environmental claims and claims expenses represent management's best estimate
of future loss and loss expense payments and recoveries which are expected to
develop over the next several decades. The Company continuously monitors
evolving case law and its effect on environmental and latent injury claims.
While reserving for these claims is inherently uncertain, the Company believes
that the reserves carried for these claims are adequate based on known facts
and current law. Our reserve review process involves a continual evaluation of
cases taking into account all currently known information as well as
reasonable assumptions related to unknown information. When facts and
circumstance change, including the impact of the risk factors, changes are
made to reflect overall reserve adequacy. It is possible that adverse
10
ACE LIMITED AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements (cont'd)
(Unaudited)
developments could cause us to re-evaluate our assumptions, which could lead
us to increase our asbestos related reserves. The National Indemnity Company
("NICO") reinsurance cover protecting Brandywine provides a layer of
protection against such adverse developments. In the event the remaining NICO
cover is insufficient to cover future adverse loss development, such
development could have a material adverse effect on future operating results.
5. Restricted stock awards
Under the Company's long-term incentive plans, 848,950 restricted Ordinary
Shares were awarded during the nine months ended September 30, 2002, to officers
of the Company and its subsidiaries. These shares vest at various dates through
September 2006. In addition, during the period, 12,588 restricted Ordinary
Shares were awarded to outside directors under the terms of the 1995 Outside
Directors Plan. These shares vest in May 2003.
At the time of grant the market value of the shares awarded under these grants
is recorded as unearned stock grant compensation and is presented as a separate
component of shareholders' equity. The unearned compensation is charged to
income over the vesting period.
6. Earnings per share
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
------------ ------------ ------------ ------------
(in thousands of U.S. dollars, except share and per share data)
Numerator:
Net income (loss) before cumulative effect of
adopting a new accounting standard $ (56,510) $ (442,590) $ 245,195 $ (170,009)
Dividends on FELINE PRIDES (6,416) (6,416) (19,246) (19,179)
------------- ------------- ------------- -------------
Net income (loss) available to holders of Ordinary
Shares before cumulative effect (62,926) (449,006) 225,949 (189,188)
Cumulative effect of adopting a new accounting
standard - - - (22,670)
------------- ------------- ------------- -------------
Net income (loss) available to holders of Ordinary
Shares $ (62,926) $ (449,006) $ 225,949 $ (211,858)
============= ============= ============= =============
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding 260,264,791 230,610,425 259,810,039 231,390,682
Dilutive effect of FELINE PRIDES - - 3,137,944 -
Effect of other dilutive securities - - 7,247,792 -
------------- ------------- ------------- -------------
Denominator for diluted earnings per share:
Adjusted weighted average shares outstanding
and assumed conversions 260,264,791 230,610,425 270,195,775 231,390,682
============= ============= ============= =============
Basic earnings per share:
Earnings (loss) per share before cumulative effect
of adopting a new accounting standard $ (0.24) $ (1.95) $ 0.87 $ (0.82)
============= ============= ============= =============
Earnings (loss) per share $ (0.24) $ (1.95) $ 0.87 $ (0.92)
============= ============= ============= =============
Diluted earnings per share:
Earnings (loss) per share before cumulative effect
of adopting a new accounting standard $ (0.24) $ (1.95) $ 0.84 $ (0.82)
============= ============== ============= =============
Earnings (loss) per share $ (0.24) $ (1.95) $ 0.84 $ (0.92)
============= ============== ============= =============
11
ACE LIMITED AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements (cont'd)
(Unaudited)
The denominator for diluted loss per share for the three months ended
September 30, 2002 and the three and nine months ended September 30, 2001
does not include the dilutive effect of FELINE PRIDES and other dilutive
securities. The incremental shares from assumed conversions are not
included in computing diluted loss per share amounts as these shares are
considered anti-dilutive. The dilutive effect of FELINES PRIDES for the
three months ended September 30, 2002 is 1,614,340 shares. The dilutive
effect of FELINES PRIDES for the three and nine months ended September 30,
2001 is 2,462,861 shares and 3,067,185 shares, respectively. Other dilutive
securities totaled 6,383,065 shares for the three months ended September
30, 2002. Other dilutive securities totaled 5,907,562 shares and 6,440,916
shares for the three and nine months ended September 30, 2001,
respectively.
7. Credit facilities
In April 2002, the Company renewed its $800 million, 364-day revolving credit
facility. This facility, together with the Company's $250 million, five-year
revolving credit facility, which was last renewed in May 2000, are available
for general corporate purposes and each of the facilities may also be used as
commercial paper back-up. The five-year facility also permits the issuance of
letters of credit. In 2000, $25 million was drawn under the five-year facility
and was repaid in April 2002. In September 2002, the Company reduced the
availability under the 364-day facility from $800 million to $500 million.
ACE Tempest Re also maintained an uncollateralized, syndicated revolving credit
facility in the amount of $72.5 million, which was guaranteed by the Company.
This facility expired in February 2002 and was not renewed. No amounts had been
drawn on this facility.
At September 30, 2002, ACE Guaranty Corp. was party to a credit facility which
provides up to $150 million specifically designed to provide rating agency
qualified capital to further support ACE Guaranty Corp's claims-paying
resources. In 2001, the facility's expiry date was extended to October 2008.
ACE Guaranty Corp. has not borrowed under this credit facility.
In September 2002, the Company arranged a $500 million unsecured syndicated,
one year LOC facility for general business purposes, including the issuance of
insurance and reinsurance letters of credit. This facility replaced a then
existing LOC facility in the amount of $450 million, which was last renewed in
August 2001. Usage under this facility was $449 million at September 30, 2002.
In September 2002, the Company also arranged a $350 million secured,
syndicated, one year LOC facility for general business purposes, including the
issuance of insurance and reinsurance letters of credit. This facility
replaced an LOC facility originally arranged in December 2001 in the amount of
$500 million. Usage under this facility was $213 million at September 30,
2002.
12
8. Debt
The following table outlines the Company's consolidated debt position at
September 30, 2002 and December 31, 2001:
September 30 December 31
2002 2001
------------ ------------
(in millions of U.S. dollars)
Short-term debt
ACE INA commercial paper $ 145 $ -
ACE Financial Services Debentures due 2002 75 75
ACE Financial Services Note - 25
Reverse Repurchase Agreements - 395
---------- ----------
$ 220 $ 495
========== ==========
Long-term debt
ACE INA Notes due 2004 $ 400 $ 400
ACE INA Notes due 2006 300 299
ACE Limited Senior Notes due 2007 499 -
ACE US Holdings Senior Notes due 2008 250 250
ACE INA Subordinated Notes due 2009 200 300
ACE INA Debentures due 2029 100 100
---------- ----------
$ 1,749 $ 1,349
========== ==========
Trust Preferred Securities
Capital Re LLC Monthly Income
Preferred Securities due 2044 $ 75 $ 75
ACE INA Trust Preferred Securities due 2029 100 100
ACE INA Capital Securities due 2030 300 300
ACE INA RHINO Preferred Securities due 2002 - 400
---------- ----------
$ 475 $ 875
========== ==========
13
ACE LIMITED AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements (cont'd)
(Unaudited)
a) Commercial paper and money market facilities
In 1999, the Company arranged certain commercial paper programs. The programs
use revolving credit facilities as back-up facilities and provide for up to
$2.8 billion in commercial paper issuance (subject to the availability of
back-up facilities, which currently total $1.05 billion) for ACE and for ACE
INA.
In October 2001, the Company and certain subsidiaries executed securities
repurchase agreements with various counterparties. Under these repurchase
agreements, the Company agreed to sell securities and repurchase them at a
date in the future for a predetermined price. The amounts due to brokers under
the repurchase agreements at December 31, 2001 of $395 million were repaid
during the first quarter of 2002 using proceeds from commercial paper raised
during that quarter. In addition, the Company repaid $150 million of expiring
commercial paper and the $25 million ACE Financial Services bank note. The
Company repaid the $75 million ACE Financial Services Debentures during
October 2002. The average cost of borrowing using commercial paper was 1.9
percent and 2.0 percent for the three and nine months ended September 30,
2002, respectively.
b) ACE Limited Senior Notes
In March 2002, ACE Limited issued $500 million of 6.0 percent notes due
April 1, 2007. The notes are not redeemable before maturity and do not have
the benefit of any sinking fund. These senior unsecured notes rank equally
with all of the Company's other senior obligations and contain a customary
limitation on lien provisions as well as customary events of default
provisions which, if breached, could result in the accelerated maturity of
such senior debt.
c) ACE INA subordinated notes
In 1999, ACE INA issued $300 million 11.2 percent unsecured subordinated notes
maturing in December 2009. The subordinated notes are callable subject to
certain call premiums. The Company repaid $50 million of these notes during
the quarter ended June 30, 2002 and $50 million during the quarter ended
September 30, 2002. The Company incurred debt prepayment expense of $25
million ($17 million, net of income tax), which is reported as other expense
in the statement of operations.
d) ACE INA RHINO preferred securities
In 1999, ACE RHINOS Trust sold in a private placement, $400 million of
Auction Rate Reset Preferred Securities ("Preferred Securities"). The sole
assets of the Trust consisted of $412 million of Auction Rate Reset
Subordinated Notes Series A ("Subordinated Notes") issued by ACE INA.
Proceeds of the an Ordinary Share Offering of September 12, 2000 which was
completed in satisfaction of a related agreement with Bank of America
Securities, were used to support our guarantee of the Subordinated Notes.
The Company repaid $200 million in principal amount of Preferred Securities
during the quarter ended June 30, 2002 and the remaining $200 million of
these Preferred Securities during the quarter ending September 30, 2002.
9. Mezzanine Equity
In April 2000, the Company publicly offered and issued 6,000,000 FELINE PRIDES.
On May 8, 2000, exercise of the underwriter's over allotment option resulted in
the issuance of an additional 221,000 FELINE PRIDES, for aggregate net proceeds
of approximately $311 million. Each FELINE PRIDE initially consists of a unit
referred to as an Income PRIDE. Each Income PRIDE consists of (i) one 8.25
percent Cumulative Redeemable Preferred Share, Series A, liquidation preference
$50 per share, of the Company, and (ii) a purchase contract pursuant to which
the holder of the Income PRIDE agrees to purchase from the Company, on May 16,
2003, Ordinary Shares at the applicable settlement rate. On May 16, 2003
pursuant to the purchase contract, the holders of the FELINE PRIDES will be
required to purchase $311 million of our Ordinary Shares. Each preferred share
is pledged to the Company to secure the holders' obligations under the purchase
contract. A holder of an Income PRIDE can obtain the release of the preferred
share by substituting certain zero-coupon treasury securities as security for
14
ACE LIMITED AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements (cont'd)
(Unaudited)
performance under the purchase contract. The resulting unit consisting of the
zero-coupon treasury security and the purchase contract is a Growth PRIDE, and
the preferred shares would be a separate security. A holder of a Growth PRIDE
can convert it back into an Income PRIDE by depositing preferred shares as
security for performance under the purchase contract and thereby obtain the
release of the zero-coupon treasury securities.
The aggregate liquidation preference of the 8.25 percent Cumulative Redeemable
Preferred Shares is $311 million. Unless deferred by the Company, the preferred
shares pay dividends quarterly at a rate of 8.25 percent per year to May 16,
2003, and thereafter at the reset rate established pursuant to a remarketing
procedure. If the Company elects to defer dividend payments on the preferred
shares, the dividends will continue to accrue and the Company will be restricted
from paying dividends on its Ordinary Shares and taking certain other actions.
The preferred shares are not redeemable prior to June 16, 2003, on which date
they must be redeemed by the Company in whole.
10. Reinsurance
The Company purchases reinsurance to manage various exposures including
catastrophe risks. Although reinsurance agreements contractually obligate the
Company's reinsurers to reimburse it for the agreed upon portion of its gross
paid losses, they do not discharge the primary liability of the Company. The
amounts for net premiums written and net premiums earned in the statements of
operations are net of reinsurance. Direct, assumed and ceded amounts for these
items for the three and nine months ended September 30, 2002 and 2001 are as
follows:
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
------------- ------------- ------------- -------------
(in thousands of U.S. dollars)
Premiums written
Direct $ 2,731,725 $ 1,923,847 $ 7,194,180 $ 5,698,290
Assumed 797,000 578,524 2,381,646 1,768,380
Ceded (1,305,938) (1,197,304) (3,491,633) (2,955,840)
------------- ------------- ------------- -------------
Net premiums written $ 2,222,787 $ 1,305,067 $ 6,084,193 $ 4,510,830
============= ============= ============= =============
Premiums earned
Direct $ 2,225,720 $ 1,776,333 $ 6,068,443 $ 5,155,324
Assumed 721,531 694,181 1,809,927 1,609,875
Ceded (1,021,672) (1,071,085) (3,017,275) (2,611,467)
------------- ------------- ------------- -------------
Net premiums earned $ 1,925,579 $ 1,399,429 $ 4,861,095 $ 4,153,732
============= ============= ============= =============
The composition of the Company's reinsurance recoverable at September 30, 2002
and December 31, 2001, is as follows:
September 30 December 31
2002 2001
------------- --------------
(in thousands of U.S. dollars)
Reinsurance recoverable on paid losses and loss expenses $ 1,190,315 $ 1,066,495
Reinsurance recoverable on unpaid losses and loss expenses 11,495,491 11,120,888
------------- --------------
Gross reinsurance 12,685,806 12,187,383
Bad debt reserve (796,438) (788,937)
------------- --------------
Net reinsurance recoverable $ 11,889,368 $ 11,398,446
============= ==============
15
ACE LIMITED AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements (cont'd)
(Unaudited)
The Company evaluates the financial condition of its reinsurers and potential
reinsurers on a regular basis and also monitors concentrations of credit risk
with reinsurers. The provision for unrecoverable reinsurance is required
principally due to the failure of reinsurers to indemnify ACE, primarily because
of disputes under reinsurance contracts and insolvencies. Reinsurance disputes
continue to be significant, particularly on larger and more complex claims,
including those related to asbestos and environmental pollution. Allowances have
been established for amounts estimated to be uncollectible.
11. Deferred compensation obligation
The Company maintains a rabbi trust for deferred compensation plans for key
employees and executive officers. In accordance with EITF 97-14, "Accounting for
Deferred Compensation Agreements Where Amounts Earned are Held in a Rabbi Trust
and Invested", assets of the rabbi trust are to be consolidated with those of
the employer, and the value of the employer's stock held in the rabbi trust
should be classified in shareholders' equity and accounted for at historical
cost in a manner similar to treasury stock. The shares issued by the Company to
the rabbi trust are recorded in Ordinary Shares issued to employee trust and the
obligation has been recorded in deferred compensation obligation, both are
components of shareholders' equity.
12. Taxation
Under current Cayman Islands law, the Company is not required to pay any taxes
in the Cayman Islands on its income or capital gains. The Company has received
an undertaking that, in the event of any taxes being imposed, the Company will
be exempted from taxation in the Cayman Islands until the year 2013. Under
current Bermuda law, the Company and its Bermuda subsidiaries are not required
to pay any taxes in Bermuda on its income or capital gains. The Company has
received an undertaking from the Minister of Finance in Bermuda that, in the
event of any taxes being imposed, the Company will be exempt from taxation in
Bermuda until March 2016.
Income from the Company's operations at Lloyd's is subject to United Kingdom
corporation taxes. Lloyd's is required to pay U.S. income tax on U.S. connected
income ("U.S. income") written by Lloyd's syndicates. Lloyd's has a closing
agreement with the IRS whereby the amount of tax due on this business is
calculated by Lloyd's and remitted directly to the IRS. These amounts are then
charged to the personal accounts of the Names/Corporate Members in proportion to
their participation in the relevant syndicates. The Company's Corporate Members
are subject to this arrangement but, as UK domiciled companies, will receive UK
corporation tax credits for any U.S. income tax incurred up to the value of the
equivalent UK corporation income tax charge on the U.S. income.
ACE INA, ACE US Holdings and ACE Financial Services are subject to income taxes
imposed by U.S. authorities and file U.S. tax returns. Certain international
operations of the Company are also subject to income taxes imposed by the
jurisdictions in which they operate.
There can be no assurance that there will not be changes in applicable laws,
regulations or treaties, which might require the Company to change the way it
operates or become subject to taxation.
The income tax provision for the three and nine months ended September 30, 2002
and 2001 is as follows:
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
------------ ------------ ------------ ------------
(in thousands of U.S. dollars)
Current tax expense $ 23,312 $ 9,366 $ 28,169 $ 38,483
Deferred tax expense (benefit) (30,646) (85,711) 9,089 (69,604)
------------ ------------ ------------ ------------
Provision for income taxes $ (7,334) $ (76,345) $ 37,258 $ (31,121)
============ ============ ============ ============
16
ACE LIMITED AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements (cont'd)
(Unaudited)
The weighted average expected tax provision has been calculated using pre-tax
accounting income (loss) in each jurisdiction multiplied by that jurisdiction's
applicable statutory tax rate. A reconciliation of the difference between the
provision for income taxes and the expected tax provision at the weighted
average tax rate for the three and nine months ended September 30, 2002 and
2001, is provided below.
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
------------ ------------ ------------ ------------
(in thousands of U.S. dollars)
Expected tax provision at weighted
average rate $ (10,461) $ (76,306) $ 33,331 $ (41,517)
Permanent differences
Tax-exempt interest (6,507) (3,739) (13,589) (11,380)
Goodwill - 7,247 - 17,340
Other 5,605 (7,223) 6,166 (6,060)
Net withholding taxes 4,029 3,676 11,350 10,496
------------- ------------ ------------ ------------
Provision for income taxes $ (7,334) $ (76,345) $ 37,258 $ (31,121)
============= ============ ============ ============
The components of the net deferred tax asset at September 30, 2002 and December
31, 2001 are as follows:
September 30 December 31
2002 2001
------------ ------------
(in thousands of U.S. dollars)
Deferred tax assets
Loss reserve discount $ 486,085 $ 523,195
Foreign tax credits 174,278 155,079
Policyholder dividends 48,524 47,509
Net operating loss carryforward 446,430 495,048
Other 310,587 299,068
------------ ------------
Total deferred tax assets 1,465,904 1,519,899
------------ ------------
Deferred tax liabilities
Deferred policy acquisition costs 44,082 66,454
Unrealized appreciation on investments 98,863 28,570
Other 35,430 38,448
------------ ------------
Total deferred tax liabilities 178,375 133,472
------------ ------------
Valuation allowance 135,592 135,592
------------ ------------
Net deferred tax asset $ 1,151,937 $ 1,250,835
============ ============
The valuation allowance reflects management's assessment, based on available
information, that it is more likely than not that a portion of the deferred tax
asset will not be realized due to the inability of certain foreign subsidiaries
to generate sufficient taxable income. Adjustments to the valuation allowance
are made when there is a change in management's assessment of the amount of
deferred tax asset that is realizable.
17
ACE LIMITED AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements (cont'd)
(Unaudited)
At September 30, 2002, the Company has net operating loss carryforwards for
U.S. federal income tax purposes of approximately $1.3 billion which are
available to offset future U.S. federal taxable income through 2021.
13. Subsidiary Issuer Information
The following tables present condensed consolidating financial information for
ACE Limited (the "Parent Guarantor"), ACE INA Holdings, Inc. and ACE Financial
Services, Inc. (formerly Capital Re Corporation), (the "Subsidiary Issuers")
at September 30, 2002 and December 31, 2001 and for the three and nine months
ended September 30, 2002 and 2001. The Subsidiary Issuers are indirect
wholly-owned subsidiaries of the Parent Guarantor. Investments in subsidiaries
are accounted for by the Parent Guarantor and the Subsidiary Issuers under the
equity method for purposes of the supplemental consolidating presentation.
Earnings of subsidiaries are reflected in the Parent Guarantor's investment
accounts and earnings. The Parent Guarantor fully and unconditionally
guarantees certain of the debt of the Subsidiary Issuers.
Condensed Consolidating Balance Sheet as at September 30, 2002
(in thousands of U.S. dollars)
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE
Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated
---------- ------- ------- ---------------- -------------- ------------
Assets
Total investments and cash $ 181,469 $ 7,256,362 $ 1,002,573 $ 9,297,154 $ - $ 17,737,558
Insurance and reinsurance balances
receivable - 2,149,518 27,397 1,031,150 - 3,208,065
Reinsurance recoverable - 9,399,216 1,142 2,489,010 - 11,889,368
Goodwill - 2,130,908 96,723 489,229 - 2,716,860
Investments in subsidiaries 7,002,502 - 152,000 (152,000) (7,002,502) -
Due from subsidiaries and
affiliates, net 156,748 (194,915) (51,395) 246,310 (156,748) -
Other assets 17,892 3,779,195 223,844 1,257,003 5,277,934
------------ ------------- ------------ ------------- ------------- -------------
Total assets $ 7,358,611 $ 24,520,284 $ 1,452,284 $ 14,657,856 $ (7,159,250) $ 40,829,785
============ ============= ============ ============= ============= =============
Liabilities
Unpaid losses and loss expenses $ - $ 14,370,086 $ 69,404 $ 7,201,741 $ - $ 21,641,231
Future policy benefits for life and
annuity contracts - - - 419,041 - 419,041
Unearned premiums - 3,145,797 353,104 2,026,733 - 5,525,634
Short-term debt - 145,280 75,000 - - 220,280
Long-term debt 499,239 999,630 - 250,000 - 1,748,869
Trust preferred securities - 400,000 75,000 - - 475,000
Other liabilities 100,804 2,648,952 168,216 1,123,190 - 4,041,162
------------ ------------- ------------ ------------- ------------- -------------
Total liabilities 600,043 21,709,745 740,724 11,020,705 - 34,071,217
------------ ------------- ------------ ------------- ------------- -------------
Mezzanine equity 311,050 - - - - 311,050
------------ ------------- ------------ ------------- ------------- -------------
Total shareholders' equity 6,447,518 2,810,539 711,560 3,637,151 (7,159,250) 6,447,518
------------ ------------- ------------ ------------- ------------- -------------
Total liabilities, mezzanine equity
and shareholders' equity $ 7,358,611 $ 24,520,284 $ 1,452,284 $ 14,657,856 $ (7,159,250) $ 40,829,785
============ ============= ============ ============= ============= =============
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
18
ACE LIMITED AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements (cont'd)
(Unaudited)
Condensed Consolidating Balance Sheet as at December 31, 2001
(in thousands of U.S. dollars)
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE
Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated
---------- ------- ------- ---------------- -------------- ------------
Assets
Total investments and cash $ 489,596 $ 6,443,230 $ 901,905 $ 8,101,182 $ - $ 15,935,913
Insurance and reinsurance balances
receivable - 1,715,873 24,075 781,614 - 2,521,562
Reinsurance recoverable - 9,259,608 8,194 2,130,644 - 11,398,446
Goodwill - 2,186,142 96,723 489,229 - 2,772,094
Investments in subsidiaries 5,621,604 - 152,000 (152,000) (5,621,604) -
Due from subsidiaries and
affiliates, net 348,372 (478,645) (11,862) 490,507 (348,372) -
Other assets 64,570 3,313,941 184,509 995,729 - 4,558,749
------------- ------------- ------------- ------------- ------------- -------------
Total assets $ 6,524,142 $ 22,440,149 $ 1,355,544 $ 12,836,905 $ (5,969,976) $ 37,186,764
============= ============= ============= ============= ============= =============
Liabilities
Unpaid losses and loss expenses $ - $ 14,468,024 $ 75,823 $ 6,184,275 $ - $ 20,728,122
Future policy benefits for life
and annuity contracts - - - 382,730 - 382,730
Unearned premiums - 2,055,459 323,951 1,474,019 - 3,853,429
Short-term debt - - 25,000 395,428 - 495,408
Long-term debt - 1,099,473 74,980 250,000 - 1,349,473
Trust preferred securities - 800,000 75,000 - - 875,000
Other liabilities 106,385 2,395,745 138,586 444,129 - 3,084,845
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities 106,385 20,818,701 713,340 9,130,581 - 30,769,007
------------- ------------- ------------- ------------- ------------- -------------
Mezzanine equity 311,050 - - - - 311,050
------------- ------------- ------------- ------------- ------------- -------------
Total shareholders' equity 6,106,707 1,621,448 642,204 3,706,324 (5,969,976) 6,106,707
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities, mezzanine equity
and shareholders' equity $ 6,524,142 $ 22,440,149 $ 1,355,544 $ 12,836,905 $ (5,969,976) $ 37,186,764
============= ============= ============= ============= ============= =============
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
19
ACE LIMITED AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements (cont'd)
(Unaudited)
Condensed Consolidating Statement of Operations
For the three months ended September 30, 2002
(in thousands of U.S. dollars)
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE
Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated
---------- ------- ------- ---------------- -------------- ------------
Net premiums written $ - $ 1,075,787 $ 42,887 $ 1,104,113 $ - $ 2,222,787
Net premiums earned - 863,326 29,613 1,032,640 - 1,925,579
Net investment income 12,872 76,737 11,703 106,491 (8,063) 199,740
Other income (expense) - (14,516) - 484 - (14,032)
Equity in earnings of subsidiaries 17,301 - - - (17,301) -
Net realized gains (losses) on
investments (55,564) (47,386) (33,012) (99,320) - (235,282)
Losses and loss expenses - 609,457 4,976 713,359 - 1,327,792
Life and annuity benefits - - - 59,697 - 59,697
Policy acquisition costs and
administrative expenses 20,174 235,300 13,487 235,601 (881) 503,681
Interest expense 8,619 35,742 3,017 5,227 (3,926) 48,679
Income tax expense (benefit) 2,326 (2,815) (7,103) 258 - (7,334)
------------ ------------ ------------ ------------ ----------- ------------
Net income (loss) $ (56,510) $ 477 $ (6,073) $ 26,153 $ (20,557) $ (56,510)
============ ============ ============ ============ =========== ============
Condensed Consolidating Statement of Operations
For the three months ended September 30, 2001
(in thousands of U.S. dollars)
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE
Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated
---------- ------- ------- ---------------- -------------- ------------
Net premiums written $ - $ 662,841 $ (1,229) $ 643,455 $ - $ 1,305,067
Net premiums earned - 639,010 17,688 742,731 - 1,399,429
Net investment income 14,605 88,546 11,542 86,161 (7,945) 192,909
Other income (expense) - - - (1,858) - (1,858)
Equity in earnings of subsidiaries (417,958) - - - 417,958 -
Net realized gains (losses) on
investments (25,065) (9,709) (8,879) (15,190) - (58,843)
Losses and loss expenses - 461,693 16,038 1,063,896 - 1,541,627
Life and annuity benefits - - - 29,706 - 29,706
Policy acquisition costs and
administrative expenses 15,080 199,828 8,161 187,326 (198) 410,197
Amortization of goodwill - 14,490 1,051 4,371 - 19,912
Interest expense (3,034) 43,808 3,840 5,564 (1,048) 49,130
Income tax expense (benefit) 2,126 3,295 (12,100) (69,666) - (76,345)
------------- ------------- ----------- ------------- ----------- ------------
Net income (loss) $ (442,590) $ (5,267) $ 3,361 $ (409,353) $ 411,259 $ (442,590)
============= ============= =========== ============= =========== ============
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
20
ACE LIMITED AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements (cont'd)
(Unaudited)
Condensed Consolidating Statement of Operations
For the nine months ended September 30, 2002
(in thousands of U.S. dollars)
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE
Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated
---------- ------- ------- ---------------- -------------- ------------
Net premiums written $ - $ 2,887,006 $ 88,637 $ 3,108,550 $ - $ 6,084,193
Net premiums earned - 2,232,787 78,029 2,550,279 - 4,861,095
Net investment income 41,948 236,989 35,154 313,380 (26,792) 600,679
Other income (expense) - (25,587) - 4,286 - (21,301)
Equity in earnings of subsidiaries 358,254 - - - (358,254) -
Net realized gains (losses) on
investments (78,248) (81,859) (51,933) (188,844) - (400,884)
Losses and loss expenses - 1,557,630 10,818 1,573,438 - 3,141,886
Life and annuity benefits - - - 106,004 - 106,004
Policy acquisition costs and
administrative expenses 53,263 607,442 36,764 667,787 (2,643) 1,362,613
Interest expense 16,745 116,374 9,564 14,482 (10,532) 146,633
Income tax expense 6,751 23,330 (5,664) 12,841 - 37,258
------------ ------------ ------------ ------------- ------------ ------------
Net income $ 245,195 $ 57,554 $ 9,768 $ 304,549 $ (371,871) $ 245,195
============ ============ ============ ============= ============ ============
Condensed Consolidating Statement of Operations
For the nine months ended September 30, 2001
(in thousands of U.S. dollars)
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE
Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated
---------- ------- ------- ---------------- -------------- ------------
Net premiums written $ - $ 1,872,616 $ 42,209 $ 2,596,005 $ - $ 4,510,830
Net premiums earned - 1,763,422 56,049 2,334,261 - 4,153,732
Net investment income 42,015 275,700 35,205 262,144 (21,458) 593,606
Other income - - - 827 - 827
Equity in earnings of subsidiaries (166,398) - - - 166,398 -
Net realized gains (losses) on
investments (25,065) (39,662) 14,779 (12,706) - (62,654)
Losses and loss expenses - 1,252,928 21,814 2,173,019 - 3,447,761
Life and annuity benefits - - - 58,511 - 58,511
Policy acquisition costs and 27,437
administrative expenses 45,342 550,395 545,032 (595) 1,167,611
Amortization of goodwill - 43,470 3,153 13,041 - 59,664
Interest expense (8,282) 137,240 10,486 16,769 (3,119) 153,094
Income tax expense (benefit) 6,171 17,620 2,652 (57,564) - (31,121)
------------ ------------ ------------ ------------ ------------ ------------
Income before cumulative effect of 148,654
adopting a new accounting standard (192,679) (2,193) 40,491 (164,282) (170,009)
Cumulative effect of adopting a new
accounting standard (net of income
tax) - (50) (22,800) 180 - (22,670)
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) $ (192,679) $ (2,243) $ 17,691 $ (164,102) $ 148,654 $ (192,679)
============ ============ ============ ============ ============ ============
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
21
ACE LIMITED AND SUBSIDIARIES
Notes to interim Consolidated Financial Statements (cont'd)
(Unaudited)
Condensed Consolidating Statement of Cash Flows
For the nine months ended September 30, 2002
(in thousands of U.S. dollars)
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE
Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated
---------- ------- ------- ---------------- -------------- ------------
Net cash flows from (used for)
operating activities $ (148,253) $ 127,199 $ 36,047 $ 1,576,914 $ - $ 1,591,907
------------ ------------ ------------ ------------- ------------- ------------
Cash flows from investing activities
Purchases of fixed maturities (149,170) (2,231,174) (480,079) (9,891,150) - (12,751,573)
Purchases of equity securities - (60,165) (94,670) - (154,835)
Sales of fixed maturities 342,097 1,842,602 436,144 8,847,729 - 11,468,572
Sales of equity securities - 54,512 - 55,865 - 110,377
Maturities of fixed maturities - - - 249,426 - 249,426
Net realized gains (losses) on
financial futures contracts - - - (117,580) - (117,580)
Acquisition of subsidiaries - 54,380 - - - 54,380
Other - - 1,129 (103,540) - (102,411)
------------ ------------ ------------ ------------- ------------- -------------
Net cash from (used for) investing
activities $ 192,927 $ (339,845) $ (42,806) $ 1,053,920) $ - $ (1,243,644)
------------ ------------ ------------ ------------- ------------- -------------
Cash flows from financing activities
Dividends paid on Ordinary Shares (122,846) - - - - (122,846)
Dividends paid on FELINE PRIDES (19,246) - - - (19,246)
Proceeds from short term debt - (383,109) (25,000) 132,981 - (275,128)
Proceeds from long term debt 499,155 (100,000) - - - 399,155
Advances to (from) affiliates 359,103 - 9,891 (368,994) - -
Proceeds from exercise of options
for Ordinary Shares 40,723 - - - - 40,723
Proceeds from shares issued under
ESPP 7,472 - - - - 7,472
Repayment of trust preferred
securities - (400,000) - - - (400,000)
Capitalization of subsidiary (1,098,896) 1,185,956 25,000 (112,060) - -
Dividends received from subsidiaries 260,000 - - (260,000) - -
------------ ------------ ------------ ------------- ------------- -------------
Net cash used for financing
activities $ (74,535) $ 302,847 $ 9,891 $ (607,073) $ - $ (369,870)
------------ ------------ ------------ ------------- ------------- -------------
Net increase (decrease) in cash (29,861) 90,201 3,132 (85,079) - (21,607)
Cash - beginning of period 32,525 355,327 1,027 282,502 - 671,381
------------ ------------ ------------ ------------- ------------- -------------
Cash - end of period $ 2,664 $ 445,528 $ 4,159 $ 197,423 $ - $ 649,774
============ ============ ============ ============= ============= =============
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
22
ACE LIMITED AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements (cont'd)
(Unaudited)
Condensed Consolidating Statement of Cash Flows
For the nine months ended September 30, 2001
(in thousands of U.S. dollars)
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE
Guarantor) Issuer) Issuer) Eliminations (1) Adjustments(2) Consolidated
---------- ------- ------- ---------------- -------------- ------------
Net cash flows from (used for)
operating activities $ (8,893) $ (270,099) $ 51,909 $ 1,188,405 $ - $ 961,322
------------ ------------ ------------ -------------- ------------- ------------
Cash flows from investing activities
Purchases of fixed maturities (119,715) (1,245,557) (819,018) (8,730,042) - (10,914,332)
Purchases of equity securities - (94,569) - (63,534) - (158,103)
Sales of fixed maturities 96,274 1,598,007 664,717 8,012,636 - 10,371,634
Sales of equity securities - 101,501 52,370 - 153,871
Maturities of fixed maturities - - 6,500 32,690 - 39,190
Net realized gains (losses) on
financial futures contracts - - - (44,060) - (44,060)
Other - (3,876) 68,178 (148,123) - (83,821)
------------ ------------ ------------ -------------- -------------- ------------
Net cash from (used for) investing
activities $ (23,441) $ 355,506 $ (79,623) $ (888,063) $ - $ (635,621)
------------ ------------ ------------ -------------- -------------- ------------
Cash flows from financing activities
Dividends paid on Ordinary Shares (94,279) - - - - (94,279)
Dividends paid on FELINE PRIDES (19,251) - - - - (19,251)
Proceeds from short term debt, net - 86,961 - - - 86,961
Advances to affiliates 8,697 (41,861) 41,346 (8,182) - -
Proceeds from exercise of options
for Ordinary Shares 19,770 - - - - 19,770
Proceeds from shares issued under
ESPP 7,063 - - - - 7,063
Repurchase of Ordinary Shares (179,446) - - - - (179,446)
Dividends received from subsidiaries 258,691 - - (258,691) - -
------------ ------------ ------------ -------------- -------------- ------------
Net cash from (used for) financing
activities $ 1,245 $ 45,100 $ 41,346 $ (266,873) $ - $ (179,182)
------------ ------------ ------------ -------------- -------------- ------------
Net increase (decrease) in cash (31,089) 130,507 13,632 33,469 - 146,519
Cash - beginning of period 46,516 253,447 26,576 281,530 - 608,069
------------ ------------ ------------ -------------- -------------- ------------
Cash - end of period $ 15,427 $ 383,954 $ 40,208 $ 314,999 $ - $ 754,588
============ ============ ============ ============== ============== ============
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
23
ACE LIMITED AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements (cont'd)
(Unaudited)
14. Segment information
Following changes in executive management responsibilities, during the
first quarter of 2002, the Company reassessed and changed its reporting
segments from the individual operating units to lines of business. The
Company operates through four business segments: Insurance - North
American, Insurance - Overseas General, Global Reinsurance and Financial
Services.
Insurance - North American includes the operations of ACE USA and ACE
Bermuda, excluding the Financial Solutions business in both the U.S. and
Bermuda which is now included in the new Financial Services segment, and
ACE Canada. ACE USA primarily comprises the domestic U.S. and Canadian
operations of ACE INA, which were acquired on July 2, 1999, and the
operations of ACE US Holdings, which were acquired on January 2, 1998.
These operations provide property and casualty insurance and reinsurance
coverage, including excess liability, professional lines, satellite, excess
property and political risk, to a diverse group of industrial, commercial
and other enterprises.
Insurance - Overseas General includes the operations of ACE International,
including ACE Europe, ACE Japan, ACE Far East and ACE Latin America. ACE
International primarily comprises the international operations of ACE INA,
which were acquired on July 2, 1999. ACE International provides property
and casualty insurance, accident and health insurance and consumer-oriented
products to individuals, mid-sized firms and large commercial clients. In
addition, ACE International provides customized and comprehensive insurance
policies and services to multinational firms and their cross-border
subsidiaries. Insurance - Overseas General also includes the insurance
operations of ACE Global Markets, which primarily encompasses the Company's
operations in the Lloyd's market (including for segment purposes Lloyd's
operations owned by ACE Financial Services). ACE Global Markets provides
funds at Lloyd's to support underwriting by the Lloyd's syndicates managed
by Lloyd's managing agencies which are owned by the Company. The
reinsurance operation of ACE Global Markets is included in the new Global
Reinsurance segment.
Global Reinsurance comprises the operations of ACE Tempest Re, ACE Tempest
US and ACE Tempest UK and the reinsurance operations of ACE Global Markets.
These subsidiaries primarily include property catastrophe reinsurance
provided worldwide to insurers of commercial and personal property. Global
Reinsurance also includes the operations of ACE Tempest Life Reinsurance.
The principal business of ACE Tempest Life Reinsurance Ltd. is to provide
reinsurance coverage to other life insurance companies. The life
reinsurance business completed its first full year of operations in 2001.
Financial Services includes the financial guaranty business of ACE Guaranty
Corp. and ACE Capital Re International ("ACE Financial Services"). Financial
Services also includes the financial solutions business in the U.S. and
Bermuda. ACE Financial Services provides value-added reinsurance products
in several specialty insurance markets. ACE Financial Services has two
principal divisions: financial guaranty and financial risks. The financial
guaranty division is comprised of municipal and non-municipal financial
guaranty reinsurance and credit default swaps. The financial risks division
is comprised of mortgage guaranty reinsurance, trade credit reinsurance and
title reinsurance. The financial solutions business includes insurance and
reinsurance solutions to complex risks that generally can not be adequately
addressed by the traditional insurance marketplace.
a) The following tables summarize the operations by segment for the three
and nine months ended September 30, 2002 and 2001.
b) For segment reporting purposes, certain items have been presented in a
different manner than in the consolidated financial statements. For
segment reporting purposes, items considered non-recurring in nature
have been aggregated and shown separately net of related income taxes,
and net realized gains (losses) have been presented net of related
income taxes.
24
ACE LIMITED AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements (cont'd)
(Unaudited)
Statement of Operations by Segment
For the three months ended September 30, 2002
Insurance - Insurance - Corporate
North Overseas Global Financial and ACE
American General Reinsurance Services Other(1) Consolidated
---------- ---------- ----------- --------- --------- ------------
(in thousands of U.S. Dollars)
Operations Data
Property and Casualty
Gross premiums written $ 1,783,574 $ 1,007,923 $ 185,474 $ 493,225 $ - $ 3,470,196
Net premiums written 869,008 689,318 131,008 476,605 - 2,165,939
Net premiums earned 654,003 647,308 194,307 373,113 - 1,868,731
Losses and loss expenses 452,643 445,900 101,069 328,180 - 1,327,792
Policy acquisition costs 54,493 140,860 37,339 17,132 - 249,824
Administrative expenses 86,031 107,031 10,174 15,912 29,894 249,042
------------ ------------ ----------- ------------ ---------- ------------
Underwriting income (loss) 60,836 (46,483) 45,725 11,889 (29,894) 42,073
------------ ------------ ----------- ------------ ----------- ------------
Life
Gross premiums written - - 58,529 - - 58,529
Net premiums written - - 56,848 - - 56,848
Net premiums earned - - 56,848 - - 56,848
Life and annuity benefits - - 59,697 - - 59,697
Policy acquisition costs - - 3,189 - - 3,189
Administrative expenses - - 1,626 - - 1,626
Net investment income - - 6,927 - - 6,927
------------ ------------ ----------- ------------ ----------- ------------
Underwriting income (loss) - - (737) - - (737)
------------ ------------ ----------- ------------ ----------- ------------
Net investment income -
property and casualty 101,500 28,519 23,863 45,615 (6,684) 192,813
Other income (expense) (271) (230) 554 431 - 484
Interest expense 7,595 493 4,565 3,103 32,923 48,679
Income tax expense (benefit) 41,661 (3,141) (1,432) 6,761 (16,349) 27,500
------------ ------------ ----------- ------------ ----------- ------------
Income excluding net realized gains
(losses) & non-recurring expense 112,809 (15,546) 66,272 48,071 (53,152) 158,454
Debt prepayment expense* - - - - (9,436) (9,436)
Net realized gains (losses)* (51,006) (13,850) (26,564) (58,544) (55,564) (205,528)
------------ ------------ ----------- ------------ ----------- ------------
Net income (loss) $ 61,803 $ (29,396) $ 39,708 $ (10,473) $ (118,152) $ (56,510)
============ ============ =========== ============ =========== ============
* Shown net of income tax
(1)Includes ACE Limited, ACE INA Holdings and intercompany eliminations.
25
ACE LIMITED AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements (cont'd)
(Unaudited)
Statement of Operations by Segment
For the three months ended September 30, 2001
Insurance - Insurance - Corporate
North Overseas Global Financial and ACE
American General Reinsurance Services Other(1) Consolidated
---------- ---------- ----------- --------- --------- ------------
(in thousands of U.S. Dollars)
Operations Data
Property and Casualty
Gross premiums written $ 1,317,724 $ 673,035 $ 94,787 $ 384,649 $ - $ 2,470,195
Net premiums written 550,063 423,689 36,708 262,431 - 1,272,891
Net premiums earned 478,321 445,103 69,348 374,481 - 1,367,253
Losses and loss expenses 468,366 378,568 228,996 465,697 - 1,541,627
Policy acquisition costs 58,028 114,013 18,465 13,601 - 204,107
Administrative expenses 74,929 82,386 11,246 13,339 22,181 204,081
------------ ----------- ---------- ----------- ----------- ------------
Underwriting income (loss) (123,002) (129,864) (189,359) (118,156) (22,181) (582,562)
------------ ----------- ---------- ----------- ----------- ------------
Life
Gross premiums written - - 32,176 - - 32,176
Net premiums written - - 32,176 - - 32,176
Net premiums earned - - 32,176 - - 32,176
Life and annuity benefits - - 29,706 - - 29,706
Policy acquisition costs - - 559 - - 559
Administrative expenses - - 1,450 - - 1,450
Net investment income - - 119 - - 119
------------ ----------- ---------- ----------- ----------- ------------
Underwriting income - - 580 - - 580
------------ ----------- ---------- ----------- ----------- ------------
Net investment income -
property and casualty 105,617 24,896 16,847 43,469 1,961 192,790
Other income (expense) (1,147) (94) - (617) - (1,858)
Amortization of goodwill (90) 958 3,503 1,051 14,490 19,912
Interest expense 8,798 653 4,409 35,270 49,130
Income tax expense (benefit) 13,145 (37,728) (33,433) 7,035 (18,997) (69,978)
Net realized gains (losses)* (1,401) 1,653 (4,624) (23,039) (25,065) (52,476)
------------ ----------- ----------- ------------ ----------- ------------
Net income (loss) $ (41,786) $ (67,292) $ (146,626) $ (110,838) $ (76,048) $ (442,590)
============ =========== =========== =========== =========== ============
* Shown net of income tax
(1) Includes ACE Limited, ACE INA Holdings and intercompany eliminations.
26
ACE LIMITED AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements (cont'd)
(Unaudited)
Statement of Operations by Segment
For the nine months ended September 30, 2002
Insurance - Insurance - Corporate
North Overseas Global Financial and ACE
American General Reinsurance Services Other(1) Consolidated
---------- ---------- ----------- --------- --------- ------------
(in thousands of U.S. Dollars)